Investors should buy stocks that rely on China’s economic
expansion including Jiangxi Copper Co. and Ping An Insurance
Group Co. after Premier Wen Jiabao announced this week the
government will fine-tune policies at an “appropriate time,”
Shen Minggao, the Hong Kong-based head of China research at
Citigroup, said in a report today.

“More catalysts in policy and fundamentals are possible to
lay a solid footing for a year-end rally,” Shen said. “There
is more upside than downside going forward. The market momentum
may carry on in the near term.”

The Shanghai Composite Index, China’s benchmark measure,
rallied for a fifth day and was set for the biggest weekly
advance in a year. The stocks gauge climbed 1.4 percent to
2,470.72 at 9:39 a.m. local time. The Hang Seng China
Enterprises Index of Chinese stocks listed in Hong Kong added
3.3 percent today, extending an 18 percent rally this week.

Citigroup joined UBS AG and Barclays Plc in predicting a
policy easing after Premier Wen signaled the government is
poised to end a two-year monetary tightening campaign as
inflation slows and economic growth decelerates.

China’s inflation rate eased to 6.1 percent in September
from a three-year high of 6.5 percent in July. The economy grew
9.1 percent in the third quarter, the least in nine quarters.

It’s a good time to be “less defensive” in Chinese
stocks, UBS strategist John Tang said in a note yesterday. UBS
boosted its rating for consumer discretionary stocks to
“overweight” and upgraded the construction, machinery and
shipping industries to “neutral’ from ‘‘underweight.’’

Improving Liquidity

Liquidity conditions have probably ‘‘bottomed’’ in the near
term and the slowing in producer and consumer price inflation
may help to support earnings, Citigroup’s Shen said. Europe’s
plan to stem the region’s sovereign-debt crisis will also
‘‘comfort” the market temporarily, Shen wrote.

European leaders persuaded bondholders to take 50 percent
losses on Greek debt and resolved to increase the size of the
rescue fund, responding to global pressure to step up the fight
against the financial crisis.

China Stock Performance

Even with this week’s rally for the Shanghai Composite, the
index is headed for its biggest monthly decline in six years
excluding the 2008 global financial crisis. The measure has
gained 5 percent in October, trimming the 2011 loss to 12
percent. The central bank has raised interest rates three times
in 2011 and ordered lenders to set aside a bigger portion of
their deposits to curb inflation that’s near a three-year high.

The Shanghai measure is valued at 11.3 times estimated
earnings, compared with a record low of 10.7 times on Oct. 21,
according to data compiled by Bloomberg.

Officials will make adjustments at a “suitable time and by
an appropriate degree” and will maintain “reasonable” growth
in money supply, Wen said during a visit to Tianjin, according
to a statement published on the government’s website on Oct. 25.